World stocks hit by Greek loan delay

By IBT Staff Reporter On 06/20/11 AT 6:56 AM

World stocks, the euro and crude prices fell on Monday and bond yields in heavily indebted euro zone countries jumped after the region's finance ministers delayed a final decision on extending emergency loans to Greece.

Yields on safer U.S. Treasuries and German Bunds slipped and gold prices held steady at above $1,530 an ounce.

Euro zone finance ministers have postponed a final decision on extending a further 12 billion euros in emergency loans to Greece, ratcheting up pressure on Athens to first impose harsh austerity measures.

They said they expected the money, the next tranche in last year's 110 billion euro bailout package extended by the European Union and the International Monetary Fund, to be paid by mid-July.

At the moment then, we are still in limbo. The EU and ECB appear to have reached a compromise on private sector involvement in the Greek bailout, but are still demanding austerity measures which are unacceptable to some in Greece, said Kit Juckes, currency strategist at Societe Generale.

The euro was down 0.6 percent at $1.4222, edging back in the direction of a three-week low of $1.4073 hit last Thursday on trading platform EBS, and down 0.8 percent to 1.2041 Swiss francs.

The dollar rose 0.5 percent against a basket of major currencies.

The yield on 10-year Greek government bonds jumped 30 basis points (bps) to 17.827 percent, not far from a euro lifetime high of 18.90 percent hit on Friday.

The cost of insuring Greek debt against default rose, with the five-year credit default swaps (CDS) up 103 bps to 2,000 bps after earlier matching a record high of 2,025 bps hit last week.

Yields on 10-year Italian government bonds were up 3.4 bps to 4.858 percent and the five-year Italian CDS rose 11 bps to 182 bps after Moody's warned late on Friday that it could cut its rating on Italy's sovereign debt, adding to contagion fears in the euro zone.

That's the worry: How far is this going to spread?, said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin.

UBS strategists said in a note that investors should remain underweight global equities and cyclical commodities, even though risk asset valuations were undemanding, until euro zone debt uncertainty subsided and U.S. growth improved.

The deepening political crisis in Greece has done nothing to change UBS's view that a default was likely, they said.

Whether this leads to imminent default, remains unclear ... We, the markets and more recently the ratings agencies, believe default is unavoidable. What is less clear, however, is how the crisis might spread via financial linkages to other parts of the capital markets, they said.

Precisely that uncertainty is reason, we believe, to remain cautious, as reflected in our underweight allocation to global equities.

(Additional reporting by Anirban Nag, William James and Simon Jessop in London; Editing by Susan Fenton and Hugh Lawson)

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